Starting RE Development Company
For any monkeys who have successfully started their own RE Development shop, how have you approached personal finances and creating some stability within your business? I am gearing up to leave the stability of a salaried position and enter the world of choppy compensation which comes with starting my own shop. I am anticipating a 2-4 year timeline for my first projects to get entitled and built, and am brainstorming ways to maintain some level of income in the interim. For vague background on me, I’m ~VP level at a large Dev company, my strategy involves bringing in an established co-gp partner and doing $50-100m deals, my wife works and has a solid income, I have a kid on the way, have saved a few hundred thousand and plan to utilize for pursuit costs, do not come from a wealthy family.
Some ideas I’ve had: - RE consulting / fee development - Bring in investor/strategic partner at company level that provides capital for start up costs - buy value-add/stabilized deals and charge fees (downside is this takes up time that I would like to allocate to my ground up business)
As someone who started their own shop about a year ago, alternative sources of income are hard to come by. You could do consulting/fee development, or side GC jobs if you're proficient in construction but all of those are going to take up a lot more time than you anticipate and are very hard to balance. I would focus 100% of your time on the deals, and making sure you have capital partners for the deals.
If they are unentitled I would just structure both an acq fee and an entitlement management fee that will help get you to construction. I would also really narrow down a very specific business plan, very hard to raise money right now for a new operator even if you have a good track record at larger named institutions, especially for new construction. You could do existing value add deals, but I would be hyper focused on exactly what you want to do as that will be an easier sell to investors.
Have talked to groups investing at company level and they are very expensive and you'll give up a lot of equity that you are beholden to the rest of your career. Not worth it for some quick bucks.
I would also think twice about leaving a salaried job with a kid on the way in this development economy unless you have investors lined up or have a bombshell business plan.
Left my gig 2 years ago and didnt make a single penny from real estate for 18 months. The deal flow is real for me now- will likely see 1.5mm-3mm in liquidity events over the next 2 years.. I eventually secured a consulting contract with an up and coming operator, but it wasn't easy work and the money wasnt great (luckily only ~10 hrs per week).
Congrats on the success so far. Do you plan to continue the consulting work after the liquidity events?
If I can keep the contract and keep everyone happy I will.. I may try and rotate to a more advisory role as the platform grows, maybe taking a haircut on my monthly fee
1.5-3M in cash/promote to you? That's amazing especially in this environment.
Correct- I found a small niche doing a higher volume of smaller deals in one market.
Would rather be the biggest fish in a small pond, than a small fish fighting all the big guys
Can you stay at your current job during some/all of the entitlement process?
More to the point... does this make sense for you? I know that the goal for all/many of us is to own our own firm, but you sound young and it seems like your finances are in a precarious position. Why does this need to happen now? Do you have anything in the pipeline? Is there a ticking clock on anything that demands you make the leap at this exact moment?
Have you actually done the cost/benefit analysis? You're relatively senior, probably have a decent income, and even IF you find a deal, you're already talking about giving away a significant portion of the upside. Lets say you get a 4% developer fee, paid over the course of the 4 years you think the first deal will take. For a $50mm project that's $2mm of fee - how does that $500,000 a year compare to your current income? Is that size deal reasonable?
All of your ideas for generating income are... aspirational. If all of your ideas for making money involve either working for someone else, giving away huge slugs of your economics, or managing to buy existing assets in order to churn fees, then why bother being on your own in the first place? In the first case you're just in the same position you are today, in the second you're in the same position you are today but with a far higher risk profile, and the third option is just silly, because it's not like those kinds of assets are just lying around for people to pick up at an amazing basis.
There are really only two paths to "create stability" in entrepreneurship. Either have a project lined up, ready to start throwing off income for you, or have enough money that you can comfortably throw it into the gutter for two or three years without it impacting your financial situation. It sounds like you don't really check either of those boxes, so maybe the right move is to stick it out for another few years or until you manage to tie up a development site that you think works.
I'll add to this, OP - why do you need to do a $100M ground up deal as your first project?
Buying a $5M retail building or renovating a $25M class C building is both less risky and less capital intensive.
The specific strategy I am pursuing requires a larger deal size. I have acquired and renovated several smaller apartment deals while I have been employed. These deals have been lucrative and somewhat manageable while keeping my job. However, my passion and trained skillset is not value-add apartments, it’s the big ground-up projects like the one I am pursuing. I have a co-gp partner that is on board with putting up guarantees and GP equity.
Oh, wow, what an amazingly creative strategy! If only I had thought "do bigger deals!" as my investment philosophy.
If your "strategy" relies on doing large deals, you are going to fail. Not "might fail" but "almost certainly will fail".
Lol. You're "passionate" about huge development projects? Are you also "passionate" about making money? I guess you work with a lot of people who are passionate about doing grubby little small scale deals, and this is what sets you apart?
You should not be thinking about starting your own shop. You aren't ready for it. If you love doing megaprojects, stick with someone who has the support system for you to do that.
Why is any "co-GP" partner putting up all this equity for you to go and do a massive project? Why not do it themselves? Why not do it with someone else? What are you bringing to the table that someone else isn't? However good and "passionate" you are about this, someone out there has more experience, more money, more connections, more access. If you are giving up so much to your partner to get them on board, then how is it any different than working for someone else and trying to take a small piece of the back end?
Look, here is the basic concept behind RE entrepreneurship - do you have a single reason why someone should do a deal with you, versus someone else? Do you have land tied up at an attractive basis? Do you have a skill set or knowledge base no one else has? Do you have money or connections that will ease the fundraising process? Are you operating in a part of the market in which there are few competitors? The answer seems to be no, no, no, and no.
So why is anyone going to give you the time of day? You want to do big projects, but how do you source them? How are you doing a better job at that than any established firm? When my partner and I look at deals we do for ourselves, we always ask ourselves "why are we seeing this". If a broker shows me a 75,000 sf greenfield site, why am I being approached? How many other folks had to pass before it was brought to me? What does that say about the financial feasibility of the project?
You seem to have given 0 thought to any of this, which is really really scary for someone without a deep reserve of savings to fall back on, who is expecting a new family member soon, who doesn't seem to have a single competitive advantage which would allow him to succeed...
It’s not a new concept to partner with a larger developer for the first few deals. I have an agreement with an established development company and we have a specific business plan that we plan to execute on. Obviously I bring something to the table or they would not work with me. Should I call them up and explain that I am an idiot and they should not work with me because someone on an anonymous forum thinks so?
I didn’t mention in the original post that my wife and I have NW of ~2m with ~1m liquid. The few hundred thousand that I mentioned is in a separate savings account specifically for RE pursuit cost risk. This is not a war chest. But is there ever a perfectly safe time to take entrepreneurial risk?
Goal was to start a thread about start up development shops and provide some personal context. I would appreciate if we don’t continue the low blows.
I’m not sure why you feel the need to completely flame this guy.
From someone who actually develops market rate, nothing he is saying is unreasonable. Risky, sure but OP clearly can weight this himself and doesn’t need you to tell him he’s wrong and has not business trying to go out on his own.
Honestly this is the perfect time to start from a market standpoint. He just needs to find deals (which are honesty plentiful from what I’m seeing).
Nothing wrong with chasing larger deals. He has a co-gp and the experience.
Stick to what you know ozz and leave this guy alone. He doesn’t need your bad energy. Honestly no one in this sub does.
If I were you I would get a deal locked down before jumping ship
There’s some great advice here and one or two success posts which should get some wind in your sails. I’ll just expand on what I think is the best advice - padding your deal pipeline.
My first six projects/deals on my own all got delayed for reasons out of my control - think like seller dying, finding unknown tanks during DD, utility service fiascos, etc. And those were a mix of short, medium, and long term deals and consulting gigs. So I tried to stack my work flow to balance short term cash needs with long term paydays, while diversifying sources, and I still got fucked.
I share that to say you need to make sure your deal is airtight. Not like you sign the PSA and fuck out of your day job the next day. Make sure you’re through DD and staring at closing before jumping ship. If it’s value-add then have building permits in hand, or if it’s entitlements then have engineers drafting plans before you jump ship. It might be ethically dubious, but I think you should be managing side projects up to the point that your day job is suffering. That’s the time to jump ship.
Thanks for the feedback. Getting delayed on the first six deals sounds about right. Way to persevere! It sounds like you were pursuing a mix of different investment strategies and maybe even multiple asset classes, is this diversification something you plan to do long term?
I can attest to the importance of getting a deal to the closing table before leaving your job. I recently had a development deal die during DD after spending 6 months on it. I was spending a few hours a day on the deal and it was challenging to sneak the work in around my regular job duties, but I am glad I still have my job.
I wasn’t particularly trying to diversify. I have a pretty broad mix of experience and was just looking at different options where I knew I could execute and generate cash. This might be controversial but I don’t think you should be hyper focused on one asset class or investment strategy upfront. Stay broad and nimble to have a competitive edge on deals over bigger shops. Once you have a team, then it helps to have a focused strategy to direct employees and hiring strategy.
I think you are choosing a great time to go out in your own OP.
Pick up a copy of the book “risk ruin riches”, read the trammel crow lessons learned.
The only thing that matters in this industry is reputation - do everything can to make sure things go well and treat people right. Worst case you’ll have a job somewhere if this doesn’t work out.
Good luck and please report back on progress - I think many of us aspire to do what you are embarking on and would love to hear lessons learned as you launch.
Would you be open to doing a few smaller bankruptcy deals on your own with the few hundred k and build that up on the side with your salaried role?
Because I see this as you'll go out on your own, no offense but there are tons of VP level guys that are doing this now - why are you different? Why would you get a deal over the dozens of shops with real assets pursuing the $50-$100mm deal range that is literally everyone and even institutional capital.
Why are you better than Blackstone - and the reality is you're not. Is there a segment in the $5-15mm range or $1-5mm range that they aren't playing at where you can put down meaningful capital and build something there?
I think another thing to think about is the few hundred k, sure good for pursuit costs but what do you do when you tie up a $50mm deal even? You should really have access to millions to be doing deals this size even with a co-GP. At 30% that's $15mm in equity and even if you split the 10% of that with a GP you need to put up $750k on one deal that will be locked up for 5+ years and you may lose everything...
I’m just curious where development is working and where capital wants to do big development deals, especially unentitled land with a co-GP scenario (without a deal yet) where the “big brothers” going to have to hold the “little brothers” hand just to give up some of their fees to the little brother? Seriously not a market in this country that has institutional capital, taking down any land for entitling purposes - you’re either well healed or a REIT today, that’s it. This is a major risk: keep the employment, raise your kid and invest in people’s development funds as the economy moves forward and ride out the maternity leave. Trust me: development is dead right now across the board, do not bet your life and your family’s lives on it right now.
Lol. Guess we spotted another 23 year old analyst pretending to be someone who knows something.
Started my own shop about 5 years ago with a deal in hand and two experienced partners. Turned that one off deal into a company/partnership with now over 12 deals.
My 2 cents, the way to break into this business as a “younger” guy is pretty clear cut.. get a good site tied up.. as mentioned by several others unless you have some competitive advantage in construction, design, or finance (or a combination of all ideally), your only value add is the dev site.
Building off that, I would NOT quit my day job until you have something tied up for two reasons. First, just because you have the savings built up where you can go negative for 2+ years, you presumably worked incredibly hard to save that, why blow it if you don’t have to? If you’re going to use the nest egg, save it for chase costs, not living expenses. Second, you need to seriously look at yourself in the mirror and ask are you willing to throw away any free time / leisure for the next 5+ years. A way you can easily answer this question for yourself is to start aggressively hunting for a site while still working full time at your day job. If it’s too hard, time consuming, and you can’t find anything.. let me help you by saying going out on your own is NOT for you.
You have to be a fucking ANIMAL to make it. Is that you?
But, but... he has a co-GP lined up and everything! Surely that's enough?
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